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I would go for midcaps & smallcaps rather than largecaps in India: Krishna Memani, Invesco

ET Now|
Updated: Jul 16, 2019, 01.46 PM IST
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Krishna Memani-1200

Highlights

  • Like Fed in 2008, govt has to take concrete steps to raise liquidity.
  • Unless govt takes concrete measures, growth will go below 6% very rapidly.
  • Govt can't depend on recapitalisation of PSUs to improve liquidity.
Growth outlook in India has deteriorated and there was nothing in the Budget that helps it. The liquidity condition in the Indian economy is not good and it is not improving either. As a matter of fact, it is probably deteriorating and that is something that they have to be very concerned about, says Krishna Memani, Vice-Chief of Investments, Invesco. Excerpts from an interview with ETNOW.

How do you see Indian markets given the slowdown concerns -- both domestic and global?
The Indian markets are suffering from the same thing that emerging markets are suffering overall. The growth outlook on a global basis is not very rosy and the valuations in Indian markets were high to begin with, There was a bit of a euphoria following the election and they are giving back on that rise after the elections. So the growth outlook in India has deteriorated and there was nothing in the Budget that helps it. This is something that we will be dealing with for quite some time.

Has the government taken adequate steps to address the liquidity concerns in your view?
No, not at all. If you look at the risks in the Indian economy and therefore for the Indian markets in the near term, the NBFC cash squeeze is by far the biggest near term concern and a recapitalisation plan and other things at the margin really does not solve the issue in any meaningful way. If the government is really concerned about near term growth, they have to take steps. The liquidity condition in the Indian economy is not good and it is not improving either. As a matter of fact, it is probably deteriorating and that is something that they have to be very concerned about.

Let’s discuss the tax on FPIs as well. It is obviously going to dent sentiments quite significantly.
The challenge the government faces in the budget is on the revenue side. The growth outlook is not good enough to generate significant revenue growth and they have to find ways of replenishing that. The Reserve Bank dividends help somewhat; PSU sales help somewhat, but at the end of the day, the growth outlook has to improve and that is not improving.

They are running around trying to find revenues from whatever sources they possibly can. While they are focussed on the revenue side, their real challenge is on the expenditure side. Transfer payments for certain parts of the economy are good political objectives but from a long-term perspective, they really do not do much for getting growth going in the Indian economy. It is a big challenge and taxation and other revenue measures are really not helping much on that front.

How prolonged can the slowdown be in your view? Even consumption heavyweights like Titan, Bajaj Finance, GCPL are all acknowledging the slowdown quite openly now. What are your thoughts on the current trend that we are seeing?
The government has to be very concerned about that because their policy measures in the last administration basically squeezed the Indian economy real hard. Post elections, they have to take real measures soon as otherwise, the growth outlook for the Indian economy is not going to be 7%. It is going to go below 6% very rapidly. We need some economic remedy and they have not provided any of that in the current Budget. Also, I do not see any discussions on that front. This is a really critical issue for the Indian economy and they have to get to it really quickly, otherwise growth is going to be much lower than what we are anticipating and what they are anticipating in their Budget numbers.

What are your thoughts on the FII flows into India? With current valuations and the corporate setup, how do you see that panning out?
Flows in India will come about if the growth outlook for India improves meaningfully and that is what we were hoping for. We were hoping for some real concrete policy action relatively quickly. They have to do that in the first two years of the current administration because otherwise there will be politics in the second half and the likelihood of coming up with concrete actions in that phase will be very difficult. So they have to come up with some real concrete policy action and there does not seem to be much going on on that front. Given the valuation level and growth outlook deteriorating rather than improving, both on the short-term and long-term basis, it is very difficult to see significant amount of flows coming into the Indian markets from foreign investors.

Auto has been seeing a lot of pain. We have seen a sharp valuation cut. Do you think it merits a closer look?
Autos is a global industry and the valuation cuts in autos is in line with valuation cuts everywhere else. This is not a sector that is going to be a favoured by anybody and not just in India, but also on a global basis. As they transition from fossil fuel technology to electric technology and autonomous vehicles, the capital expenditures are gargantuan and the payoff is very spotty or uncertain. I do not think autos is really where I want to put my money in.

What are your thoughts on the broader market valuations then?
The opportunity in the Indian market for foreign investors is really in midcaps, smallcap, micro cap and the reason for that is most of the flows that have arrived in India from foreign investors really have come from investors who are making an emerging market wide allocation rather than an India allocation and therefore those investors focus on the large cap names that they know and the consumer stories. That is why the valuations on those sectors is quite rich relative to the rest of the emerging markets. If you are going to invest in Indian equities, my preference would be midcap, small cap rather than largecaps.

Fed chairman Jerome Powell’s latest commentary suggests that the Fed is readying for that rate cut in July. Are you expecting the same? How does the setup look like for emerging markets like India over the medium term?
Yes, we expect the Fed to cut rates in July. Powell had an opportunity to walk that market expectation back in his testimony in the Congress and he did not. It is almost certain that in July they will be cut. We expect another cut in September and the reason for that is very simple; inflation is relatively absent and there is really no reason for the Federal Reserve to try to squeeze the US economy down and we expect monetary policy to be far easier on a global basis, including India, for that matter than it had been in 2071-18.

It certainly helps emerging markets because it takes the lustre off the dollar and therefore dollar softens. In that environment, emerging market equities have done well and you will probably see revival of those flows back into emerging markets and India would be an indirect beneficiary of those flows.

You also mentioned that the entire liquidity situation has rather deteriorated that the government needs to take concrete steps. What are these steps that you would like to see in order to improve the entire liquidity situation?
They have to take a real direct leadership position with respect to injecting liquidity in the market and the best example of that I can cite is what the Federal Reserve did in 2008. The US market at that time was getting squeezed every which way and they found really creative ways of providing liquidity in the marketplace. Clearly all of that entailed a significant amount of risk and whatever the government does today in India, will probably entail a significant amount of risk as well but they have no choice. If they do not do that, if they just simply rely on recapitalisation of the banks and that leading to a significant improvement in liquidity conditions, that is not likely to happen.

I cannot specifically indicate a measure that they have to take but they have to take direct action rather than relying on recapitalisation or the banking channel to make it all work. If the Reserve Bank of India looks hard enough, it can find tools and mechanisms to help with that. It is really a question of political will rather than finding ways of injecting liquidity in the market.

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